The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Inflation in Canada is close to the 2 per cent target. Core inflation rose more rapidly than was expected in the Bank’s July Monetary Policy Report (MPR), mainly reflecting unexpected sector-specific factors. Total CPI inflation is evolving broadly as expected, as the pickup in core inflation was largely offset by lower energy prices. Underlying inflationary pressures are muted, given the persistent slack in the economy and the continued effects of competition in the retail sector.

CIBC economist and frequent and respected Canadian housing market commentator Benjamin Tal published a paper last week about how Canadian consumers have behaved in recent years against a backdrop of historically low borrowing rates. The main conclusion he draws is that consumers have been paying back principal on their borrowings at a much faster rate than previously estimated and that the impact of rising rates in the future will be less problematic than many observers have suggested.

In terms of mortgages, the rate of growth has not kept pace with the rate of housing sales. In fact, Tal finds that it is “less than half that pace”. He estimates that 40% to 50% of Canadian households have mortgage amortization periods of less than 20 years and 30% to 40% are on accelerated payment schedules which further shorten their amortizations. In the past year, as evidence of responsible borrower behaviour, Tal found that principal repayments rose four times faster than new mortgages and “for every mortgage dollar taken, a record high 90 cents of principal are being paid back”.